From next April, the government requires pension providers and trustees to offer members 'free and impartial face-to-face guidance' on choices for defined contribution (DC) pots at the point of retirement. Although this will be a significant break with the past, Towers Watson's latest FTSE 350 DC Pensions survey shows that schemes used by most FTSE 100 employers already offer some sort of retirement support with FTSE 250 employers less likely to offer guidance at the moment.
Three quarters of FTSE 100 employers offer annuity broking services to help retirees shop around for competitive rates. Some 43 per cent issue 'countdown to retirement' guides, and a third offer pre-retirement counselling sessions.
Will Aitken, senior DC consultant at Towers Watson, said: "Calling guidance 'free' will not make it free to provide. The costs will have to be picked up either by employers, by taxpayers, or by savers through the charges they pay. However, this is not as onerous as it sounds because not all schemes will be coming at this from a standing start.
"Where annuity broking or pre-retirement counselling is already on offer, substituting the new guidance might not always add to costs. In some cases, it could even be cheaper, but a lot will depend on how the requirements around guidance are designed. While the government appears to be open minded on some of the details, it wants to ensure that any guidance is free, personalised to the individual and conducted face-to-face."
According to Towers Watson, the type of guidance that gets offered from 2015 will depend, to a large extent, on the rules that the Financial Conduct Authority (FCA) draws up. It suggests that the answers the FCA comes up with could shape the choices that people ultimately make.
Will Aitken said: "The way the choice is framed could have a huge bearing on how many people cash out their pension savings, buy annuities, or stay invested in riskier assets. Hundreds of thousands of people will be retiring every year, and a large proportion of them will be going into guidance without their minds already made up.
"Although it is only at retirement that guidance becomes compulsory, members should be encouraged to start thinking seriously about their options before then. Currently, default funds for members who do not make investment choices split according to what type of annuity people are expected to buy and when, rather than whether they are expected to buy one at all. Most assume that members will retire at 65 and buy a level annuity after taking their tax-free lump sum. These investment strategies will be reviewed, but giving people more choices makes it less likely that any default will be right for them.
"The best value to the member of such guidance will be if it helps them take a complete view of their retirement income planning. In the short term, there will be a lot of people coming up to retirement with small DC pots, either because they have been enrolled very recently or because they were only ever trying to top up a defined benefit pension. Some of these may be able to use their DC pots as a bridge to retirement, while they work part-time and wait for other pensions to start being paid. The choices will look very different for people whose DC pensions are expected to meet a large part of their retirement income needs."